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Economy of the Indochinese DR
The Economy of the Indochinese DR is strongly tied to its political regime. Throughout its history the Indochinese Democratic Republic has shifted between a centrally planned economy and reform towards a market-involved system. Ever since the creation of the Indochinese DR in 1995, the country has denounced the neoliberal reforms it engaged in during the late eighties and early nineties. Indochina is considered a Third World development country even though some economists have noted the trends towards more capital inflow and a growing industrial output in recent years. The regime of Indochina describes its economic organization as 'a mixed economy in the line of market socialism'. Most economists agree to this classification even though they are more inclined towards the usage of the label 'third way mixed economy'. Composition and performance Characteristics and numbers * Public ownership: The economy of the Indochinese DR is classified by economists as a 'third way mixed economy' even though its strongly leans towards market socialism as it existed in Eastern Europe under 'liberal' Communist leadership. About 80 percent of the economy (measured as share of output in GDP) is in public ownership, either trough direct state ownership or owned in collectives. The share of private ownership in the agricultural industry has grown the last decade to a moderate 25% but strategic industries have been monopolized under state-governed enterprises. In the light of this balance heavily inclined towards public ownership some critics denounce the classification of the economy as third way. Nonetheless a lot of collectively owned enterprises are no longer tied to centrally planned directives and the Indochinese DR is even opening up to international trade after a period of isolationism in the late nineties. * Guided economy: The establishment has stepped down of a centrally planned economy. It traded its Soviet-like model of centrally planned directives for what it calls a 'guided economy'. The state still interferes heavily in the economy trough a thorough macro-economic policy, subsidizing food products, pulling up trade barriers to protect the domestic market, state enterprises etc. Nonetheless only the strategic sectors remain subject to direct government control. Recent government programs are aimed at introducing more market-incentives and allowing a minimal degree of competition. The positive reaction of friend and foe on these changes have risen expectancies on Indochina's economic future performance. * Agrarian economy: Food production is the most important sector of the Indochinese economy, the entire primary sector making up a large share of its total economic activity and delivering a major share to its GDP. The Unity Party fiercely invested in modernizing the agricultural production and seeks to use its biggest sector as motor of further economic developments. Farming is to generate capital as well as make the internal market grow and thus provide a fertile basis for further industrialization. Next to the food industry, the Indochinese DR also has a considerable textile and manufacturing sector. Manufacturing and information technology form a large and fast-growing part of the national economy and are good for most of the actual growth. * GDP growth and inflation: 2011 estimates put the GDP results for this year on 95 billion USD. This would result in a per capita GDP of 1,168 USD in nominal terms and 3,104 USD calculating for purchasing power parity. The Indochinese DR achieves an average annual GDP growth of about 7 percent since 2004, the inflation rate hit however 11.8 percent in December 2010 urging the government to react. The inflation is currently being suppressed but this will result in a cooling down of the growth rate, which is expected to fall 2 to 3 percent. * Financial dimension: The Indochinese Dong has been devalued two times since late last decade. However in comparison to before 2000, investment grew threefold and domestic savings quintupled. The amount of foreign capital, albeit only allowed in the form of Foreign Direct Investments and under strict supervision of the Indochinese Central Bank, has risen to spectacular numbers ever since 2007 when neighboring economies got overheated. It should also be added that the Indochinese DR attracts foreign capital by keeping its Dong artificially cheap and by setting attractive interest rates. * Social dimension: Deep poverty, defined as a percent of the population living under $1 per day, has declined significantly and is now smaller than that of China, India, and the Philippines. Much can be attributed to equitable economic policy that aimed at improving living standards and preventing the rise of inequality; this included egalitarian land distribution, investing in poor remote areas and the supporting the poor with education and health fees. The Indochinese DR has a remarkable score on the GINI-index, measuring the equity in a country as the relative share of wealth (income) to the relative share in the population. The unemployment rate in Indochina is 2.9 percent. * International trade: Though the country has opened up after its isolationist policy in the past, it denounces monetarist and neoliberal organization schemes. The Indochinese DR defends the right on a protectionist policy and applies it itself for agricultural and textile products. Nonetheless the Indochinese DR has trade agreements with amongst others the Grand Yarphese Republic and realizes a positive trade balance by exporting so-called cash crops like coffee, tea and rubber. It is also one of the most important oil-exporters in the region. Structural problems In the past the country used to cope with a low living standard and a small internal market, but in recent years it has combatted those problems with a high degree of success. A modernization of the agricultural production and policies aimed at an equitable distribution of produced wealth have increased the per capita GDP. Domestic savings have even been multiplied by five due to the reforms initiated in the early 2000s. Now that high growth rates of up to seven percent are attained the specter of inflation is haunting the Indochinese. Even though the regime refrained from monetary financing in the past only to avoid growth-eating inflation, liberalizing prizes where in the past there has been prize control set free the historically oppressed inflation. The 2004 reforms have released even more growth potential but nonetheless kept government control on food prices, traded off against an estimated 2 to 3 percent of the annual GDP growth rate. Another main problem with the Indochinese economy is the lack of ties with foreign markets. There are various trade barriers for agricultural production such as subsidized food production and tariffs and quota for import. The artificially low Indochinese Dong contributes to this competition advantages of the domestic production. The lack of ties with the world market caused friction with trading partners in the past and continuous to trouble the ties between the Indochinese DR and the world market. In spite of the Indochinese maintaining a protectionist policy it keeps opening up its internal market and remains to receive a considerable influx of foreign capital. Institutional Framework Economic Planning Administration (EPA) For the control of the economy a special institute has been developed. This used to be the domain of the Economics Department but this administration has been 'privatized' and enjoys greater autonomy from the party than other departments. The former Economics Department is now known as the Economic Planning Administration (EPA) and is responsible for implementing ánd creating economic legislation. The EPA consists of an executive board of seven members that set up directives for the centrally planned industries. It determines the production quota for utility sectors like electricity or the extraction of natural resources like mining. Sectors like infrastructure, housing and transportation are also largely dependent on public investments issued by the EPA. The EPA governs the state-owned enterprises, creates economic legislation, is responsible for the overall macro-economic policy and monitors and centralizes international trade. Indochinese Central Blank (ICB) The Economic Planning Administration controls the financial branch of economy by means the the Indochinese Central Bank (ICB). The ICB is the cornerstone of a monstrous mono bank system that controls the Indochinese Dong, the national currency. The ICB maintains a policy of price control on basic resources and heavily subsidizes the food industry. The artificial low prices however pose a treat in the form of a monetary overhang and oppressed inflation rates. The relation of the Dong to the international markets is currently marked by an undervaluation. The ICB keeps the Dong artificially low to attract foreign capital. To stimulate the industrial growth with domestic capital in the future, the ICB has worked out a plan that should cope with the lack of means for further financing the system: :Taking into account the weak financial markets and the lack of sustainability by foreign capital, the ICB proposes to accumulate capital trough micro-financing local collective initiatives. The ICB would invest private savings into a nationwide investment program that allows people to finance their enterprise against low interest rates. This ought to stimulate economic growth immediately and deliver financial profit on the long run. We need to use the agricultural industry as the motor of our further industrial development. (From: the 2011 Development Plan) The ECB proposed this as an alternative to the financing trough foreign capital it resorted to in the past. The plan is to focus on the secondary and tertiary sectors and is complemented by a privatization of the agricultural economy. Agricultural production is to be taxed in-kind and the farmers will be allowed to trade the surplus on private markets. The government will restrict its distribution of subsidized food to the poorer strata of society. Opposers of this policy program wanted to use resources to stress another problem of the Indochinese economy: the lack of innovation and technological development. Economic policy and reform plans Between plan and reform Before 1991, Vietnam was entirely dependent on the COMECON-market and held a mostly planned economic system. When the Soviet Union collapsed, Vietnam and Laos submitted to the support by the IMF and the World Bank. Economic and political reforms lead to a moderate take-off especially in the agricultural sector. The share of industrial production and services in the GDP increased. Most reforms did not manage to get a firm hold within society because in 1994 political unrest caused an economic setback. When Nguyễn Văn Đỗ became president he turned back the reforms to assure tight control over society once again, something he deemed crucial for attaining national unity and avoiding a collapse of the regime. By the early 2000s economic stagnation had rooted out all optimism about a higher standard of living. To spark economic growth, Văn Đỗ pushed policy towards the stronger integration of market incentives into the socialist economic structure. The current policy is based on the experiments of market socialism which showed success in eastern Europe and China before. The economic apparatus is however still subject to high levels of government interference. Good results have nonetheless become standard and privatization of small agricultural enterprises have averted a shortage of food supply. The regime refrained from monetary financing in the past only to avoid growth-eating inflation, liberalizing prizes where in the past there has been prize control set free the historically oppressed inflation. The 2004 reforms have released growth potential but nonetheless kept government control on food prices, traded off against an estimated 2 to 3 percent of the annual GDP growth rate. The regime keeps up various trade barriers such as subsidized food production or tariffs, mainly for the import of agricultural products. The Indochinese Dong is kept artificially low which gives a competition advantages to the domestic suppliers. The lack of ties with the world market caused friction with trading partners in the past and continuous to trouble the ties between the Indochinese DR and the world market. In spite of the Indochinese maintaining a protectionist policy it keeps opening up its internal market and remains to receive a considerable influx of foreign capital. Currently the UPI is divided over whether to stress capital accumulation or innovation as the motor of growth. The majority want to stimulate growth by an extensive growth model and introducing market incentives while the other side deems the closing of the 'technology gap' with other countries as highest priority. The 2011 Development Plan The Indochinese establishment was since 2004 in a huge debate on whether to stress capital accumulation or innovation as the motor of the country's growth. The majority want to stimulate growth by an extensive growth model and introducing market incentives; the 2011 Development Plan is the EPA/ICB answer stipulating the policies for such a model of growth. Hitherto the economic development has been financed with foreign capital. This meant however an increasing debt, foreign ownership and export of capital. On top of this the foreign investments were lured with an artificially cheap Dong, stimulating inflation and lowering the purchasing power of the Indochinese people. All these problems contribute to what the EPA/ICB described as 'the lack of sustainability by (financing trough) foreign capital'. The future model is to be based on financing growth with domestic savings. This however meets a barrier in the weak financial markets which the authorities seek to expand by an investment program that allows people to finance their enterprise against low interest rates. Next to the investment program, further liberalization of farming is to create a new momentum of growth specifically in that sector. The agricultural industry is thus to be used as the motor of further industrial development. Next to the outline for general macro-economic policy, the Development Plan also offers guidelines for the agricultural industry: * The army needs to be put to efficient use to cope with (natural) disasters that impaired the people's welfare, especially when the food production is hit. Emergency plans need to drawn up to this end. * Deforestation, overgrazing and over-cultivation hurt the fertility of the land and need to be countered by local regulation. The conservation of our natural resources is to be planned better in the future. * Modernization of the agricultural production will contribute to a higher output and a more efficient circulation of capital. The government needs to direct its budget toward less developed farmers. * Land redistributions from public to collective initiatives need to optimize the size of farming lands and farmers need to be able to finance their enterprise against low interest rates. * We must not concentrate on the production of cash crops alone; food for domestic consumption is key to the future financing model. Indochina needs to maintain a net exporter of agricultural products. For realizing its objectives, a set of conditions is defined which ought to create an environment favorable to prolonged growth: * High inflation and a negative balance on the public budget have a negative impact on the growth; financial and monetary policy should focus on restriction. * The gap in technology between Indochina and bigger economic powers needs to be closed by the selective import and implementation of technology. * Our government needs to foresee a high budget for social and especially educational programs for public investment in the human resources market. * Political stability, both in Indochina and broader South-East Asia, is needed as a foundation for both domestic economic growth and stable export. * The capital generated by the Indochinese economy is to be reinvested in the people of Indochina and to be distributed in an equitable fashion. Category:Indochinese DR Category:Economy